Will $1.8 Billion in Taxes and Nearly $1 Billion in Cuts Trigger Off?

Advocates for the poor, disabled and home care workers urged state officials to eliminate $950 million in spending cuts in next year’s budget by concluding that there is at least $10 billion in federal economic stimulus funds that can be used to staunch the red ink in the state’s general fund.

Although California is expected to receive more than $31 billion in federal money over the next three years not all of it can be used to replace costs incurred by the state’s general fund. Governor Arnold Schwarzenegger’s Department of Finance estimates that only $8.2 billion in federal offsets is available.

As part of the budget deal to close an estimated gap between revenues and spending commitment of $42 billion, a three paragraph bill was drafted which requires the state Treasurer and the director of the Department of Finance to determine by April 1 whether there is at least $10 billion in federal money that could be swapped for state money.

If there is $10 billion or more then the cuts, most which fall on the poor and disabled, won’t occur and a .25 percent surcharge on personal income taxes will be halved to .125 percent.

State Treasurer Bill Lockyer and Mike Genest, Schwarzenegger’s finance director heard more than three hours of testimony March 17, the vast majority of which was devoted to the harsh impact the cuts will have on those who care for the elderly in their homes, the aged, blind and disabled and persons receiving dental care from Medi-Cal, the state’s health care system for the poor.

Among the cuts, which were approved in the budget enacted February 20, are 4 percent reductions in the grants paid to welfare recipients, a $147 million savings.

Another $78 million would be saved by reducing the state’s wage contribution level to In-Home Support Services workers from $12.10 per hour to $9.50 an hour and cutting support checks to the state’s poorest aged, blind and disabled by $20 a month for individuals and $35 for couples.

Some benefits under Medi-Cal not required by the federal government, would also be eliminated such as dentistry and podiatry.

Lockyer said that under the terms of the bill his role and that of Genest was to answer a mathematical question, not a political one — is there $10 billion in federal stimulus cash that can be used to back out current state expenses?

While its always uncertain judging a final outcome from questions and comments, Lockyer raised more than once the revenue implications of halving the personal income tax surcharge.

The Legislative Analyst said on March 13 that the less than one month old budget is already $8 billion short of meeting spending commitments over the next 18 months, a view that will likely be officially embraced by the GOP governor when he submits a revised spending proposal in late May or early June The already grim fiscal situation could grow worse by more than $5 billion if voters fail to approve three cost saving measures on a May 19 special election ballot.

Given that set of facts, Lockyer reasoned, triggering off the cuts and revenues only makes the state’s economic situation worse.

“We pull the trigger, the taxes go away. The bad news comes in May and then we make all the cuts,” he said at one point.

And, later in the hearing: “What happens when the $1.8 billion disappears? More cuts.”

Advocates for the poor and disabled argued that more federal money than the Department of Finance believes can be used to offset state Medi-Cal costs.

“Even if we resolve the health issue in the most optimistic way, we don’t get to $10 billion,” Lockyer countered.

If Genest and Lockyer disagree — one says there is $10 billion, the other that there isn’t — the cuts would occur and the tax increase remain in place.

“If either thinks (the trigger) should not be pulled, it won’t be pulled,” Genest told reporters after the hearing.

Although Genest said his mind is “completely open,” it is unlikely he would vote to undo the cuts and turn off the revenue stream given the state’s dire financial condition.